Social Security and Unemployment Insurance

1
Social Security and Unemployment Insurance
2
Why do we care?

• SS is one of largest government programs
• Important element of social welfare
• Important distribution impacts
• Important efficiency impacts

3
Increasing share of government budget
4
Growing Percent of GDP
5
Growing Burden on Workers
6
problems funding SS over time
7
And Future Deficits
8
What makes these programs unique?

• Non-discretionary spending
• Compulsory participation
• Benefits depend on prior contributions
• Benefits triggered by identifiable occurrence
• Not means tested

9
Why is the Government Involved?
10
Adverse selection

• Asymmetric information and private insurance
• Private sector knows little about individuals,
  must charge everyone more than average payout
• Those who expect to use less than average payout
  not interested
• Those who are interested get more than average
  payout, driving up average
• Many people who would want insurance cant get it
  at reasonable cost

11
Other reasons

• Lack of foresight
• Moral hazard
• Economize on decision making
• Tool for income redistribution

12
How is SS financed?

• Pay as you go
• More coming in than going out
• Impact on savings
• Covers some of government deficit
• Is it a labor tax?
• Why doesnt it come out of general funds?

13
Distribution issues

• Is it regressive?
• Flat tax on first 87K, then 0
• 1980, 1995, 2015
• Intergenerational distribution
• Other idiosyncrasies

14
SS Reform

• Increase payroll tax, or apply it to all income
• Decrease benefits
• Increase retirement age
• Mixed public private
• What would be impact on stock prices?
• Who would benefit most?
• Will stock market always grow?
• Do stock market increases equate with increases
  in real output?

15
Unemployment insurance

• Why wont the private sector provide it?
• Asymmetric information and adverse selection
• Why do we need it?
• Stability
• We eat every day, not on average
• Textbook argues that it might increase
  unemployment, but Keynesians argue that it will
  actually decrease it.